South Africa expects China to help it move up the value chain

South Africa is looking for help from China to help it move up the value chain and quicken its industrialization, says Rob Davies, minister of trade and industry of South Africa.

"South Africa's exports to China are dominated by primary mineral commodities, and those are very much dependent on the vagaries of world prices. Those commodities are also low on the value chain," he says. "Our ambition in South Africa and the African continent is to move up the value chain and to focus on industrialization, and that ambition is understood and shared by China." Davies said during a news conference in Beijing at the South Africa-China Business Forum last month.

Davies, who was accompanying South African President Jacob Zuma, says China and South Africa are experiencing a higher level of consensus about the direction in which they need to move their economic cooperation.

"Both countries are seeing a very significant quantitative increase in total trade, which continues to grow at very large percentage each year, and China has been South Africa's No 1 trading partner for both exports and imports since 2009. It is also by far China's largest trading partner in the African continent," he says.

Davies says the growth in trade volume is important. Other trading partners have been caught up in the economic crisis, he says, and trade with other countries has not even reached the level of what it was in 2008.

But China-South Africa trade has what he sees as a structural imbalance, since it is not characterized by sufficient two-way trade in value-added products.

Davies says he hopes this situation will change.

A series of comprehensive strategic partnership agreements were signed between China and South Africa during Zuma's visit, such as a program for cooperation that will boost trade, investment and agriculture over the next 10 years. Other agreements include transport, agriculture, nuclear technology and nuclear energy, TV stations and locomotives.

Davies says one of the things South Africa has been doing over the past three years is to promote value-added products in the Chinese market, and to have a number of trade fairs, which already have produced some positive results.

For example, he says, South Africa is now the seventh-largest exporter of wine to China. "Our growth has been much greater than the overall growth of Chinese imports of wine."

There also has been growth in trade of motor vehicles and various kinds of machinery. But South Africa's value-added trade is still too low percentage-wise, he says.

In all of the agreements between the countries, South Africa has emphasized two things. One is to invite more people to South Africa in order to demonstrate the nation's capacity to produce more value-added products; and to cultivate more investment as a way to boost productivity.

"We have seen a pickup in Chinese investments. The last big one was the launch of the first auto plant in the Coega Industrial Development Zone.

"We are looking to the suppliers and component manufacturers to come and support that particular plant," he says.

Other areas in which South Africa is urgently seeking investment include television manufacturing, solar energy equipment, railway equipment manufacturing and steel making.

South Africa also is hoping to learn from China's free trade zones.

"We have benefited from technical support like in the design of our special economic zone programs, and that technical support will continue. We are learning from China about what you call the 'ocean' economy and what we call the 'blue' economy, that is, everything from boat-building, support for service of vessels and rehabilitation of vessels," he says.

Also, advancements in meeting global standards in agriculture products open up a significant amount of trade.

"We know that most of the world's trade, especially the growing part of it, is trade in medium products, and trade in more complex products, where we know the addition of that (value) takes place outside of our borders based on the minerals and other agriculture commodities that we may produce and export and transport," he says.

He also shares an example from a KPMG survey that shows that Africa produces and exports $6 billion in coffee. But the coffee is turned into products beyond Africa's borders that fetch $100 billion. Thus, $94 billion of the revenue is made outside of Africa.

In another example, South Africa used to be No 1 but is now the No 5 gold producing country. Italy earns more from the production of jewelry than South Africa does from the production and export of gold.

"So being in that place is not the place you need to be. We need to move up the value chain. We need to industrialize. We need to add value." he says.

Davies says industrialization is something South Africa insists on: Railway equipment that is used in Africa can be made in South Africa.

"So those are the kinds of opportunities as well as the direction we have been moving in," he says.

Davies says South Africa has been working with the support of Ministry of Commerce of China on value-added trade missions, and two such missions backed by the ministry have been visiting different parts of China.

"We have been bringing exhibitors and people who can supply value-added products." Another tactic is to have buyers from China visit South Africa.

Even though Chinese investment in terms of quantity is still below investment in South Africa from Europe and the United States, Davies says he anticipates a great increase from China.

"Likewise, although we have seen some results from the trade missions, I think there could be a very significant increase in value-added trade," he says.

He says the world's recognition of South Africa's industrialization is very important.

"It is not universal. Not everyone around the world acknowledges this. Sometimes they think it is in their interest that we remain where we were. It is in their interest that we simply supply them with minerals that they process and transform and add value to their own economy," he says. "So I think the recognition and the willingness to work toward and support our industrialization is important, but we have got a long way to go."

He says that the biggest challenge for South Africa at the moment is energy, where large quantities of affordable energy are needed.

"One of the biggest social programs we had in South Africa in the last 20 years is that we brought electricity to many, many households. It was a major, life changing experience. Poor households that ... got electricity usually got two things－one is television, which brings information, and the second one is a refrigerator, which means now they have food more regularly," he says.

He says South Africa is working on power plants, but electrical supplies will remain tight for at least the next two years.